Data-Driven Analysis for Young and Enterprising Minds

To Insure Promptitude, Not Wages

Did that get your attention? Ready to call me rude? Callous? Unwilling to accept the struggle that service industry workers go through every shift? Before you jump to any conclusions, just hear me out.

The service industry in the United States, in my opinion, has become a charade, a parody of work. Hundreds of thousands of people willingly go to work every day, knowing that their employer pays them far less than the federal minimum wage, and accepts this as the norm, with the hope that some generous customers will tip them enough to make up the difference. It’s seen in many different lights. Either this version of work is societally acceptable, with the mandate of the customer tipping their server 15%-20% of their check is seen as an act of good faith, or it’s seen as wage theft, where the ingrained responsibility of the consumer to tip their server has replaced the employer’s obligation to pay a federally mandated wage.

This post will explore the history of tipping in the US, and what would happen if service employees in restaurants were paid the same standard of wage as anyone else.

Why do we tip?

We all know to tip, but why do we physically do it? Apart from the societal need for our servers to actually live… is there something from history? As it turns out, the reason we tip comes directly from our past.

The American version of tipping wasn’t popular in the States until the late 1800’s. Before that, it was a way for Western Europeans in various aristocracies to show off to their peers. A T.I.P. (literally meaning To Insure Promptitude) was left before a meal or drink, so servers would be faster in bringing items out to customers. Wealthy Americans didn’t start using this payment method until just after the Civil War, in the late 1860’s, when they began making trips to Europe and seeing it for themselves.

Shortly after the end of the Civil War, when the South was going through Reconstruction, there was a quandary regarding how recently freed slaves should be treated in society. Legally they were freed, and therefore deserved to be paid for their work, but white owners of businesses did not want to pay them. Bring in the tip! By compensating low-skilled work (most often in the service industry) through customer gratuity, rather than through the fixed shackles of a wage (hope you get the sarcasm), workers have the potential to increase their earning power many times over by simply providing great service. This concept weaved its way through history, but likely not even the creators of the idea would realize what a national trend it would become.

Eventually, amended into the Fair Labor Standards Act in the 1990’s was the penultimate warping of this concept, into the two-tiered minimum wage system. Whereas the regular federal minimum wage currently sits at $7.25 an hour, the FLSA established provisions for a wage far below that level. Workers that receive more than $30 a month in tips qualify for a reduced minimum wage, of just $2.13 an hour, with the idea being they could make up their other income with their primary business activity, literally Insuring Promptitude. But making what was once simply a mindset into federal law had a two-pronged effect. It provided service employees with the opportunity to boost their earnings, sure, but it also allowed the people of America to steadily forget why they tip, and simply feel that they must tip.

My position on this issue is very simple. I, as a customer, do not want to directly pay the salary of the employees of the restaurant I eat at. My position is not against all of tipping, if my server does an excellent job then they deserve a tip. But forced tipping of 20% or more simply because the restaurant does not pay its workers a minimum wage, that I do have a problem with.

What if restaurants paid the real minimum wage?

Take an example, Restaurant X. X makes $25,000 a month in revenue, and let’s say after its food, drink, and management salary costs it has $3,000 to spare. X employs 8 servers for the month and pays those servers the tipped minimum wage of $2.13 an hour. For those 8 employees working 40 hours a week for 4 weeks, total wage expense to the restaurant is $2,726.40, and they have $273.60 left over in Net Income. If they were to pay the regular minimum wage of $7.25 an hour, wage expense for the month would be $9,280, resulting in a net loss of $6,280 for the month. From a flat comparison standpoint, as you can see, bringing wages up to the real minimum would not work.

Let’s imagine that our Restaurant X sells chicken and steak dinners and charges from $12-$24 for its entrees. The restaurant makes $25,000 a month, let’s say 30% of that is in appetizers, sides, and drinks. So 70%, or $17,500, is made with the entrees. Restaurant X would have to seat 973 different customers in a month to arrive at this number, with an average entrée value of $18. If the restaurant were to raise their food prices $3, making the new range of prices $15-$27, and they seat the same number of customers, they would make an additional $2,919 a month, not including any changes to their other food or drink items.

I will not continue going down the line until our hypothetical restaurant breaks even, but you can see how by raising their prices a marginal amount, or by making manageable investments into their ambiance and experience (for example, dim outside lighting and some foliage to stimulate a more formal evening crowd), our restaurant can make up the expense for paying their workers fairly. Yes, it can be done.

Is there any real-world evidence?

As recently as 2009, some big-name restaurant chains have experimented with raising their food prices and ending the practice of forcing their employees to rely on tips. Joe’s Crab Shack attempted this for three months before ending it, presumably because they could not continue the changes in many areas in which they operate. And largely, it does depend on the area. But restaurants all over the country are starting to buck the trend.

Take Packhouse Meats, in Newport, Kentucky. Packhouse decided to cut out tipping and instead, pay its servers a minimum wage of $10 an hour. This is high for industry standards, but Packhouse realized that several problems with the tipping system were resulting in a high turnover rate for its employees, and that cost a lot of money. They raised their food prices almost 20%, but on the flip side, encourages its customers not to tip. Ultimately the resulting money paid by the customer is the same, whether it be the old food price plus a 20% tip, or the new 20% higher food price with no added tip. In my opinion, this is a far fairer way to treat every stakeholder who participates in the restaurant system. The customer knows what they are buying and how much they are paying, the employee knows how much they are making and can still collect a tip if their service is truly exceptional, and the restaurant suffers little to no net change in margins. It should be noted for the critics of my position that Packhouse has since converted itself into a food truck, but it is unclear whether this was due to their wage policy or something else.

What can we do?

Demand side economists believe that wages are sticky. This means that they are affected by two factors, how much employers are willing to pay, and how much employees are willing to bargain. Once those two factors reach a median, the wage is set, and typically does not fluctuate much. Tipped wages are so low because tipped workers have let themselves believe that they do not deserve the same wages as everyone else, and feeds into the narrative of customers paying their wages for them. If you want this to change, then there’s a few things you can do.

If you work for a restaurant, start voicing your concerns to your employer. One voice is nearly powerless in the modern day right-to-work economy, but here’s a motto I often repeat to people in the industry: If every server in America got up and walked out the door because they were not being paid fairly, employers would have to pay them fairly or they would close their doors. Unions may be dying in this country, but that does not mean workers have no rights and need to accept what their boss gives them. If you eat at restaurants frequently, talk to your server about the idea of tips being built into food prices instead of a post-meal term of endearment.

In summary, tipping has undergone a transformation in America, from a ritual that rewarded service employees for exceptional job performance, to an excuse for restaurant employees to legally underpay their workers and leave customers societally forced to foot the bill. I believe that paying restaurant workers more fairly, by increasing the prices of menu items by a commensurate amount, provides greater transparency in the dining experience, leaves customers with the ability to still leave a tip for great service (its original purpose, after all) and most importantly, takes the pressure off the customer to subsidize the restaurant’s failure to pay its employees fairly.

Do you have any thoughts on this topic? Think I’m wrong and want to tell me off? Feel free to leave a comment on this post or shoot me a message with your thoughts! Thank you for reading, and stay tuned for much more!